Simon & Hobbs: Shady Accounting

The net income of Simon and Hobbs, a department store, decreased sharply during 2000. Carol Simon, owner of the store, anticipates the need for a bank loan in 2001. Late in 2000, Simon instructs the store's accountant to record a $10,000 sale of furniture to the Simon family, even though the goods will not be shipped from the manufacturer until January 2001. Simon also tells the accountant not to make the following December 31, 2000 adjusting entries:

Salaries owed to employees: $900
Prepaid insurance that has expired: $400 is this understating or overstating income on the account and is the 400.00 considered an expense now?
is this illegal? or just unethical? why would someone do this, to inflate year end income or hide transaction? thanks

Solution Preview

Carol Simon asked the accountant to follow these instructions because she is trying to get a loan next year and the actions will have the effect of making the financials appear to be more healthy than they actually are (therefore increasing her odds of obtaining the funding and, perhaps, lowering the cost of capital (interest rate) by appearing ...

Solution Summary

The owners of Simon and Hobbs ask the accountant to do some 'shady' accounting. The solution outlines the ramifications of performing the requests.